KA-BOOM: S&P Downgrades America

It’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

What was S&P even talking about? Presumably they had some theory that restraint now is an indicator of the future — but there’s no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment.

In short, S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right.

So this is an outrage — not because America is A-OK, but because these people are in no position to pass judgment.

Or, as a joint statement from the Federal Reserve, the FDIC, the NCUA, the OCC puts it:

For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change.

So what’s the real problem? Krugman’s position begins and ends with the idea that now is not the time to reduce government spending, because of the perilous state of the rest of the economy. And he may well be right. But that position should not be conflated with the dangerous and destructive idea that debt is good. It is possible to slash the deficit without cutting domestic spending. How about drastically cutting military spending, and using the proceeds for domestic infrastructure? How about raising taxes on the super-rich, the people who gain the most from corporate handouts and the military industrial complex? Because — whatever is about to be done — the problem is excessive debt. Debt transfers wealth from the taxpayer, to the institutional investor and bondholder.

The issue isn’t bombing China. That will never — realistically — happen. The issue is subtle coercion. Having nuclear missiles is not a justification for defaulting on your debt by debasing your currency. In fact, the entire paradigm of printing money to service debt is invalid under the Fourteenth Amendment that states:

Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

The point is, as Vladimir Putin stated just last week:

They are living beyond their means and shifting a part of the weight of their problems to the world economy. They are living like parasites off the global economy and their monopoly of the dollar [and possession of vast numbers of nuclear weapons]. If [in America] there is a systemic malfunction, this will affect everyone. Countries like Russia and China hold a significant part of their reserves in American securities. There should be other reserve currencies.

I love America. It has consistently been the freest nation in the world, and the greatest advocate of global freedom. Subtle coercion and default by debasement are un-American.

The fact that China could start a trade war (i.e. massive tariffs on exports to America, zero tariffs on exports elsewhere) safe in the knowledge that America will never be able, realistically, to retaliate in any significant way (because of Mutually Assured Destruction) is even more dangerous for America. That way America can lose the thing holding the economy together (cheap Chinese imports) while having next-to-zero power to do anything about it.

China has been divesting from Treasuries for a long time. Look at the gold inflows for China against dollar outflows. They are using up their dollar pile acquiring productive assets and precious metals around the globe and in the United States.

Uprooting America’s productive base, and transferring it to China in the name of “cheaper labour” was a very, very bad idea.

True. That would be a temporary reprieve. Of course the time will come that Latin America will not take a hyper-inflated dollar. And another angle is that the entire system of American hegemony would also unravel if OPEC starts demanding payment in gold instead of dollars, which is becoming increasingly likely.

The US dollar and Treasuries will tank in December when China announces free floating currency and Government bonds to the whole world. They are just waiting for the election outcome to engineer their policy.